Initial public offerings and air pollution: evidence from China
| Published date | 05 January 2015 |
| Pages | 99-114 |
| DOI | https://doi.org/10.1108/JABS-08-2014-0056 |
| Date | 05 January 2015 |
| Author | Yan Luo,Xiaolin Qian,Jinjuan Ren |
| Subject Matter | Strategy,International business |
Initial public offerings and air pollution:
evidence from China
Yan Luo, Xiaolin Qian and Jinjuan Ren
Yan Luo is an Assistant
Professor at the School of
Management, Fudan
University, Shanghai,
China. Xiaolin Qian and
Jinjuan Ren are both
Assistant Professors
based at the Faculty of
Business Administration,
University of Macau,
Taipa, Macau.
Abstract
Purpose –The purpose of this study is to investigate the impact of firms’ financing activities on the
environment. Faced with a deteriorating global environment, both corporations and regulatory bodies
have become more responsive to environmental conservation problems. However, existing literature
has not adequately addressed the question of whether and how firms’ business activities influence the
environment.
Design/methodology/approach –Using the daily air pollution indices of 120 Chinese cities from 2001
to 2012, this study found that air pollution is alleviated after firms’ initial public offerings (IPOs). This
paper proposes that firms’ IPOs influence the ambient air pollution through three channels: production
scale, technical reform and corporate governance effects.
Findings –The authors of this study found that the proceeds acquired in IPOs result in enlarged
production scales that increase pollution, while the investment of these proceeds in social
responsibility-related technical reform and enhanced corporate governance reduce pollution.
Moreover, the authors discover that firms with a higher state ownership emit fewer pollutants, thus
supporting the positive monitoring role of the Chinese government.
Originality/value –Although this study investigates the impact of IPOs on air quality in China, the
proposed analytical framework also applies to studies of other financing activities in global markets.
This study has important policy implications for government regulations in environmental controls.
Keywords IPO, Corporate social responsibility, Chinese firms, Air pollution
Paper type Research paper
1. Introduction
Air pollution adversely affects human health (Brunekreef, 1997;Brunekreef and Holgate,
2002). World Health Organization reports that air pollution is the largest single
environmental health risk today; an estimated 7 million people died of exposure to air
pollution in 2012, which is one-eighth of the total global deaths[1]. The heavily polluted air
in China has attracted great public attention. In winter, the northern cities, such as Beijing,
often experience a concentration of toxic small particles exceeding the safe level[2]. In
March 2014, the Chinese Premier, Li Keqiang, even declared “war” against pollution, and
stated that efforts would be focused on “eliminating outdated energy producers and
industrial plants”[3].
Firms are increasingly responsive to the impact of their activities on the environment
(Hoffman, 1999). Academics and executives generally agree that corporate social
responsibility (CSR) is important for the long-term success of corporations (Cheng et al.,
2014), and that environmental conservation is an indispensable dimension of CSR (Carroll,
1979). Firms with better financial performance are more concerned about social
responsibilities (McGuire et al., 1988), and firms that are more socially responsible show
better financial performance (Stanwick and Stanwick, 1998).
While previous literature extensively analyzes the relation between CSR and firm
performance, few studies actually evaluate the impact of firms’ business activities on the
Received 1 August 2014
Revised 25 September 2014
Accepted 8 October 2014
The authors sincerely thank
Ms. Jin Jin for her excellent
research assistance in the
preliminary data analysis. The
authors also thank Rozita from
Editage and Ms. WL Ma for
proofreading this manuscript.
Jinjuan Ren acknowledges the
financial support from
University of Macau
(MYRG071(Y1-L2)-FBA11-RJJ),
and Yan Luo acknowledges
the financial support from the
National Natural Science
Foundation of China (NSFC
project number 71402032).
DOI 10.1108/JABS-08-2014-0056 VOL. 9 NO. 1 2015, pp. 99-114, © Emerald Group Publishing Limited, ISSN 1558-7894 JOURNAL OF ASIA BUSINESS STUDIES PAGE 99
environment. Such investigation is indispensable as it closes the feedback loop and
provides valuable guidance to improve firm strategic decisions and government regulatory
reform. Whereas Dooley and Fryxell (1999) examine the environmental consequence of
firms’ diversification strategies and Cowton and Thompson (2000) investigate banks that
sign codes of conduct, prior studies focus mainly on firms’ investment activities. We fill in
the void by examining the environmental consequences of firms’ financing activities. In
particular, we explore whether and how an initial public offering (IPO), a milestone in a
firm’s life cycle, would affect the surrounding environment.
IPO is a strategic financing decision made by firms. The planning, application process,
promotion and sale of stocks can take a year or longer. During this process, private firms
sell part or all of their stocks to the public, and from then on these stocks are publicly
tradable on securities exchanges. Firms collect substantial amounts of funds by selling new
stocks. For example, from 2001 to 2012, 1,476 firms went public on the Chinese A-share
market and acquired average gross proceeds of RMB1.34 billion (USD231 million) per firm.
We propose that firm IPOs affect their ambient environment through at least three channels:
production scale, technical reform and corporate governance effects. According to the
firm’s IPO prospectus, the main purpose of raising capital is to invest in new projects that
expand the firms’ production scale. Because exhaustible resources serve as inputs in the
production of many goods (Antweiler et al., 2001), the increased production scale after
IPOs results in increased pollution levels. Therefore, the expansion of production scales
indicates that IPOs have a detrimental impact on the environment.
A lack of financial resources is one of the major constraints for the implementation of CSR
activities (McGuire et al., 1988). In addition to expanding production scales, proceeds from
IPOs also allow firms to invest in environmental protection activities and structural reform in
adopting clean technologies. According to Rondinelli and London (2003), technical
improvement often leads to the development of win–win technologies that improve profits
while protecting the environment. Therefore, firms with sufficient IPO proceeds are
expected to be more involved in the structural transformation of their production
techniques, which can reduce the input of exhaustible resources and thus result in reduced
pollution following IPOs. Considering the competing impact of enlarged production scales
and improved production techniques after IPOs, we expect that a nonlinear relation exists
between IPO proceeds and pollution.
After IPOs, originally private firms are exposed to public monitoring, which requires them to
submit extensive filings to regulatory bodies, satisfy stringent corporate governance
requirements, accept external monitoring and report on their CSR activities regularly. The
increased disclosure requirement and extensive public monitoring after IPOs (Coffee,
2002) promote the firms’ corporate governance standard. Thus, we hypothesize that
compared to private firms, public firms tend to be more responsive to environmental
conservation, and their IPOs lead to less pollution due to enhanced corporate governance.
While increased production scales after IPOs have a negative impact on the environment,
improved production techniques and enhanced corporate governance have an opposite
effect. The net impact of firms’ IPOs on the ambient environment is largely an empirical
issue. In this study, we use the daily air pollution index (API) reported for 120 major Chinese
cities from 2001 to 2012 as the environmental indicator. We manually link firms’ IPOs to their
respective registration places and use the change in the API at the city-level to measure the
impact of IPOs on the environment. Utilizing a cross-sectional sample, we separately
investigate the environmental effects of production scale, technique and corporate
governance. From a multivariate regression analysis, we find that the ambient air pollution
increases with IPO proceeds but decreases with the square of the proceeds. The evidence
suggests that firms that collect IPO proceeds below a certain threshold tend to spend the
funds toward increasing their production scale without structural reforms in their production
techniques. Firms that receive proceeds above a certain threshold, however, engage in
PAGE 100 JOURNAL OF ASIA BUSINESS STUDIES VOL. 9 NO. 1 2015
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